One of the provisions coming out of the Tax Act and Jobs Act of 2017 (TCJA) is that individuals cannot recharacterize a Roth IRA conversion. However, individuals are allowed to recharacterize an IRA contribution by making a trustee-to-trustee transfer from one IRA to another type of IRA. For example, a traditional IRA contribution is recharacterized as a Roth IRA contribution. This column discusses how federal employees can recharacterize IRA contributions they made for the year 2024.
How to recharacterize IRA Contributions
To recharacterize an IRA contribution, the contribution must be transferred from the first IRA (the one to which the original contribution was made) to the second IRA in a trustee-to-trustee transfer.
The deadline for transferring the first IRA to the second IRA is the due date of the federal income tax returns for the year for which the contribution was made. For example, if an individual made a 2024 traditional IRA contribution but wants to recharacterize the contribution as a Roth IRA, then the deadline to recharacterize is April 15, 2025. However, as is explained below, individuals who file their 2024 federal income tax returns by the filing due date and do not recharacterize a contribution by the filing due date can still recharacterize.
Notifying the IRA trustees
To recharacterize an IRA contribution, the IRA contributor must notify both the trustee of the first IRA, (the IRA to which the contribution was originally made) and the trustee of the second IRA (the IRA to which the contribution is being moved) that they have elected to treat the contribution as having been made to the second IRA rather than the first. The notification must be made by the date of the actual transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification must include all of the following information:
• The type and amount of the contribution to the first IRA that is to be recharacterized.
• The date on which the contribution was made to the first IRA and the yar for which it was made.
• A direction to the trustee of the first IRA to transfer, in a trustee-to-trustee transfer, the amount of the contribution and any net income, or loss allocable to the trustee of the second IRA.
• The name of the trustee of the first IRA and the name of the trustee of the second IRA, and
• Any additional information needed to make the transfer.
Traditional IRA contribution is recharacterized
In this situation, an individual makes a contribution to a deductible traditional IRA and then the individual recharacterizes some or all of the contribution as a Roth IRA contribution. If only part of the contribution is recharacterized, then the non-deductible portion of the traditional IRA contribution of the remaining traditional IRA contribution is reported on IRS Form 8606 (Nondeductible IRAs) Part I. If the entire contribution is recharacterized, none of the contribution is reported on IRS Form 8606 Part I. In either case, a statement should be attached to the tax return explaining the recharacterization. The following example illustrates:
Example 1. William is a federal employee, single and contributes to the Thrift Savings Plan. He contributed $6,000 to a new deductible traditional IRA on June 10, 2024. On March 3, 2025, William’s accountant informed William that his 2024 modified adjusted gross income (MAGI) will limit his traditional IRA contribution deduction to $2,000. His traditional IRA is worth $6,500 as of March 3, 2025. William decides to recharacterize $4,000 of the traditional IRA contribution as a Roth IRA contribution. To do this, William has $4,300 ($4,000 contribution plus $300 related earnings) transferred from his traditional IRA to a Roth IRA in a trustee-to-trustee transfer. William is eligible and does deduct the other $2,000 traditional IRA contribution on his 2024 federal income tax return.
William is not required to file IRS Form 8606 but he must attach a statement to his 2024 Form 1040 that indicates: (1) He contributed $6,000 to a traditional IRA on June 10, 2024; (2) He recharacterized $4,000 of that contribution on March 3, 2025 by transferring $4,000 plus $300 of related earnings from his traditional IRA to a Roth IRA in a trustee-to-trustee transfer; and (3) The entire $2,000 of the remaining traditional IRA contribution is deducted on his 2024 Form 1040 as an adjustment to income (2024 Form 1040, Schedule 1 Part II, Line 20). (see below)
Note that William does not report the $4,300 distribution from his traditional IRA on his 2024 Form 1040 because the distribution occurred in 2025. He also does not report the distribution on his 2025 Form 1040 because the recharacterization related to 2024 and was explained in an attachment to his 2024 income tax return.
Roth IRA contribution is recharacterized
If an individual makes a contribution to a Roth IRA and later recharacterizes some or all of it to as a traditional IRA contribution, then the individual must report the contributing portion of the Roth IRA on IRS Form 8606 Part I. If the entire contribution is not recharacterized, then the individual does not have to report the remaining portion in the Roth IRA on IRS Form 8606 Part I. The individual should attach a statement to the income tax return explaining the recharacterization.
If the recharacterization occurs in the same year as the contribution, then the amount transferred from the Roth IRA in total IRA distribution is reported on Form 1040, line 4a. If the recharacterization occurs in the year after the contribution, then the IRS owner should report the amount transferred only in an attached statement and not on the face of Form 1040. The following example illustrates:
Example 2. Elizabeth is a federal employee and contributes to the Thrift Savings Plan. She contributed $7,000 to a new Roth IRA on August 27, 2024. On December 30, 2024, she determines that her 2024 modified adjusted gross income will allow her to fully deduct a traditional IRA contribution. She decides to recharacterize the Roth IRA contribution as a traditional IRA contribution. She requests that the $7,430 Roth IRA balance ($7,000 contribution plus $430 of associated earnings) be transferred from her Roth IRA to a traditional IRA in a trustee-to-trustee transfer on that date. When Elizabeth files her 2024 federal income tax return, she deducts the $7,000 traditional IRA contribution on her 2024 tax return. She is not required to file Form 8606, but must attach a statement to her federal income tax return that indicates that: (1) She contributed $7,000 to a new Roth IRA on August 27, 2024; (2) She recharacterized that contribution on December 30, 2024 by transferring the $7,430 balance in the Roth IRA to a traditional IRA in a trustee-to-trustee transfer; and (3) $7,000 of the traditional IRA contribution is deducted on her 2024 federal income tax return.
Elizabeth includes the $7,430 distribution from the Roth IRA on line 4a on the 2024 Form 1040 (IRA distributions).
Extension of time to recharacterize
Individuals must ordinarily recharacterize IRA contributions by the extended due date of the return for the year the contribution to the first IRA was made. Individuals who file their federal income tax returns by the original due date (generally, April 15) and do not recharacterize a contribution by that date can still recharacterize if: (1) Their federal income tax return was filed in a timely fashion for the year the election to recharacterize should have been made; and (2) They take appropriate action within six months from the due date of their return including extensions. For tax returns due April 15, 2025, this period ends October 15, 2025.
Appropriate corrective action consists of: (1) Notifying the trustee(s) of the individual’s intent to recharacterize; (2) Providing the trustee with all necessary information; and (3) Having the trustee transfer the contribution. Once this is done, the individual must amend his or her federal income tax return to show the recharacterization.
The regular due date for filing an amended tax return applies. The recharacterization is reported on the federal amended tax return (Form 1040x) and written on top of page 1 of Form 1040X as “Filed pursuant to Section 301.9100-2”.